Google Capital values Renaissance Learning at $1 billion

When Google Capital announced a $40 million investment in Renaissance Learning Inc. this month, it said it was valuing the Wisconsin Rapids education technology company at $1 billion — more than double the $455 million price Renaissance had fetched from a European private equity fund a little more than two years ago.

With that, Renaissance joined a relatively elite group of privately held companies — the likes of Pinterest, Airbnb and Snapchat — whose worth has reached 10 figures.

"To have a billion-dollar valuation for a private company, it's a club few companies ever get to," said David Sims, a portfolio analyst at Sims Capital Management LLC, Milwaukee.

Renaissance was founded nearly 30 years ago, but much of the value perceived by Google Capital — a fund backed by Google Inc. — has been created in the last 21/2 years. Renaissance's value swelled as educational technology gained favor with investors and as the company's new owner, a Permira fund, applied its money, know-how and connections to the business.

Renaissance provides Internet-based teaching, assessment and testing software for teachers and students. It sells its products and services to more than one-third of all U.S. schools and in more than 60 countries. The company says it had double-digit sales growth in each of the two years since the 2011 acquisition, including 20% growth in 2013.

"Profitability almost doubled since we acquired the business," said Nic Volpi, a partner in Permira's Menlo Park, Calif., office.

It was Volpi who reached out to an acquaintance at Google Capital after Permira already had overseen many changes at Renaissance. The company has a new chief executive officer, chief technology officer and chief marketing officer.

New assessment and math products, along with upgrades of the existing product line, helped drive revenue growth, Volpi said.

It has historically been difficult to convince investors to put money into educational technology companies because schools can be so slow to act, said Judy Owen, general partner at Calumet Venture Fund, a $10 million fund based in Madison that has two educational technology, or "edtech," companies in its portfolio. But that has changed.

"Edtech is definitely hot," Owen said. "Anything that hasn't had technology touch it yet is prime territory for the next wave, and education is one of the last markets that is light on tech utilization."

Venture investment in kindergarten through 12th-grade educational technology companies rose 6% in 2013, to $452 million, according to the NewSchools Venture Fund.

The market for non-hardware education technology products and services grew to $7.9 billion in 2013, up from $7.76 billion the prior year, estimates the Software and Information Industry Association, a trade group. The testing and assessment category, which represents almost half of Renaissance's orders, was the largest single category, with over 35% growth from the previous year.

Boost from Common Core

Permira knew when it acquired Renaissance that the emerging Common Core State Standards Initiative could be a powerful catalyst for the company's products. The initiative, unveiled in June 2009 and sponsored by the National Governors Association and the Council of Chief State School Officers, details what K-12 students should know in English and math at the end of each grade.

Common Core will create greater demand for data and data analysis, according to a report published in 2013 by the Software & Information Industry Association.

"I think we've only really touched the surface of what this will mean for Renaissance," Volpi said.

When the Permira fund acquired Renaissance in 2011, the company's flagship Accelerated Reader product, which tests students on their independent reading, represented nearly 70% of sales.

Now, the company's STAR assessment product produces more revenue than Accelerated Reader, said Jack Lynch, Renaissance's chief executive officer. STAR is an Internet-based testing product, accessed on a laptop or tablet computer, that adapts the next question of a test to the student's answer on the previous question. The tests only take about 20 minutes, but allow teachers to determine what students are learning and where the gaps are that need to be addressed.

"It's like a GPS system, trying to pinpoint on the learning path where a student is," Lynch said. The report generated by STAR can be provided online and emailed to students or parents, he added.

STAR is the most-used assessment tool in the country, with more than 45 million tests completed during the 2012-'13 school year, Volpi said.

Also, Renaissance in June acquired Subtext, which has an e-reading platform that allows teachers to embed reference materials, assignments and quizzes into a text students are reading.

So if they are reading "The Great Gatsby," their teacher can embed video clips of how people dressed in the 1920s and key events of that era. "It gets kids excited about what they're reading," Volpi said.

Since the Permira acquisition, Renaissance has increased the amount of money it spends on research and development, allocating nearly 14% of revenue last year, Lynch said.

Renaissance has one of the largest data sets in the world on how kids learn and how well they know the sequence of knowledge and skills necessary in any subject, he said.

The company uses that information to develop products, along with input from experts like Margaret Heritage, assistant director for professional development at the National Center for Research on Evaluation, Standards and Student Testing at UCLA, and Karin Hess, senior associate at the National Center for the Improvement of Educational Assessment.

"The business is very profitable, generating real cash and growing organically without a need for additional investment," Volpi said. "There's a lot more growth to go and this company is really poised for that."

Minority stake

More than 30 million students and teachers around the world already use Google products such as Google Docs and Chromebooks. For its $40 million investment, Google Capital got a minority stake and will take a seat on Renaissance's board.

The funding will stay in the company, rather than be used to buy out any existing shareholders, Volpi said.

Wisconsin, where Renaissance says it plans to stay, has been a good location for the company, Volpi and Lynch said. The University of Wisconsin-Madison is "a nerve center in terms of education," and more than 50 of the company's nearly 1,000 employees work there, Volpi said. About 600 Renaissance employees work in Wisconsin Rapids, an excellent place to have a call center, he added.

"The average response time of the call center is six seconds," Volpi said. "We've never seen that level of customer service — and 90% of problems are resolved in the first call."

Wisconsin is home to other educational technology companies, including CraftArtEdu, Faculte, School Specialty, Skyward and Study Blue. For them, and other state-based firms, there's one more potential advantage associated with Renaissance's success, said Troy Vosseller, co-founder of Gener8tor, a start-up accelerator.